We have long held the opinion that holding silver and gold mining stocks would give us a leveraged return to silver and gold prices and thus generate better returns from this bull market in the precious metals arena. Taking a quick look at the above chart we can see this it has not been the case for the last few years, which requires us to give our strategy a bit of a shake.
Its true that if we go further back in time and draw the chart again then we can see that the stocks have outperformed the precious metals. However our patience wears thin when the stocks have lagged behind the metals for so long and one begins to wonder if this is now the new trend and it could be entrenched this way for some time to come.
In our humble opinion there is no substitute for owning the physical metal as we have continuously recommended, with the associated mining stocks offering leverage to the metals in return for the risks that they carry with them. However the metals space has changed and we now have funds holding massive amounts of both gold and silver and they are acting as a proxy or a paper version of gold and silver ownership. Whether the funds have the amount of gold and silver that they purport to have is a discussion for another day, however, as a vehicle for traders to ply their trade, it fits the bill. So far these funds have more or less replicated the performance of the precious metals. Yes there are risks but the inherent dangers of mining are removed, geo-political tensions disappear, start-up is not an issue, mega doses of financing are not required, good people with the right experience are not required, etc.
Now, if an investor is looking for leverage to gold and silver prices why not substitute mining stocks for an options play on one of these funds. The need to know a mining company from top to bottom and keep up with their ever changing characteristics is time consuming to say the least. Is it worth the effort? The above chart suggests that we can research and analyze these companies until the cows come home, we are simply not getting a leveraged return on the effort and risks involved.
Taking it a step further, if the quality producing stocks that make up the gold bugs index cant keep up with the metal then what chance have the juniors got? The mantra of juniors, juniors have been trumpeted for some time but will they soar this time around? Historically the juniors have soared later on in the cycle but history does not always repeat itself. This is not 1980, believe it or not, and the circumstances, the investment environment, politics, economics, social aspirations, the transfer of wealth from west to east, the dissemination of knowledge, the speed of change, etc, have all changed since the last bull market.
As a suggestion for those who do want leverage to the precious metals bull, the gold and silver funds together with the careful application of options trades could be a possible solution for you. This way we are exposed to any movement in gold prices which in turn is magnified by the effect of the option. Do remember that loses are also magnified in the same way so its not a strategy for the faint hearted. On the other hand the quality stocks are not performing as anticipated and a non-producing junior stock is a shot in the dark, however, its your money and its your call.
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